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Victory!

* Anatole Kaletsky: Associate Editor of The Times* Professor Norman Stone: Professor of International Relations and Director of the Russian Centre at Bilkent University, Ankara.* Alexei Pushkov: Anchor of the most popular Russian TV programme “Post Scriptum” which has considerable influence on Russian public perception of international events.

Speakers against the motion:

* Edward Lucas: Central and Eastern Europe correspondent for the The Economist and author of The New Cold War: How the Kremlin Menaces Both Russia and the West (2008).

Thursday, January 10, 2008

HOW well is eastern Europe placed in an era of global tightening? At first sight, it looks grim. The region has worrying imbalances at a macro level, and over the past ten years has failed to reform sclerotic public administration, calcified higher education, and congested infrastructure.

Only flyweight Slovenia has joined the euro, and the “halo effect” created by the expectation that others will join soon is fading. Past slowdowns in the rich world have had disproportionate impacts in the ex-communist countries. In 2001, for example, GDP growth in the EU-10 (now the new members of the European Union) came crashing down to barely 2%.

A new paper from Capital Economics, a London-based consultancy, tackles this question head on. The first point is that though the region’s economies are heavily dependent on exports (which make up 76% of Slovakia’s GDP, for example) they are well-shielded from any recession in the United States. Exports to the euro zone range from 40% of GDP in Slovakia to 7% in Latvia. Exports to America are in single figures—usually 1-2%.

Even if old Europe grows at only 2% next year, it argues, the EU-10 can expect growth by at least 4%. That may feel like a hard landing compared to the likely year-end growth figure for 2007, which was around 6.5%, but it is still respectable. Hungary, the Czech Republic and Poland can still expect double-digit export growth. Foreign investment of $350 billion since 2000 in the region has created a mighty engine of modern business in what are still attractively priced, politically stable countries close to rich-country markets.

Russia helps the region too. A boom there—mostly but not solely fuelled by high energy revenues—is sucking in both consumer and investment goods. A planned $1 trillion public investment programme over the next decade may be mostly stolen or wasted. But the pickings for outside contractors with the language and cultural skills needed to navigate the Russian business environment will be rich.

The clouds on this sunny outlook are as follows. First, a real slump in the euro zone would hit the east too, particularly Hungary, where the economy grew only at a feeble 0.9% in the third quarter of last year. Second is inflation, which would force central banks to tighten interest rates (where they can: in currency-board countries that’s impossible)

The third and largest worry is huge current-account deficits, particularly in the Baltics and some Balkan countries. But so long as the foreign banks continue to stand behind their local subsidiaries, a soft landing (except perhaps for property speculators) still looks likely. Wild talk last year of devaluation and credit crises in the region has so far proved just that.

The big question is really political, not economic. No government in the region combines economic vision with both political grip and integrity. Ferenc Gyurcsany’s government in Hungary has done remarkably well in bringing that country’s public finances back from the brink, but has flinched at real reform of the public sector. In most other countries, the government does little more than mind the shop.

The exception may be Poland. Though the new government is having a quiet first 100 days, businesses seem to like what they see. An international ranking of the business outlook compiled by Grant Thornton, an accountancy firm, shows soaring optimism among Polish businessmen, who are now the most confident in all Europe, and are beaten in the global ranking only by five Asian countries. That’s encouraging—although it may have as much to do with frustration with the sleaze and circuses of the past, than with deep enthusiasm for the present government.

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Regards

Edward

Bene Merito award

Without my foreknowledge, I was last year awarded the Bene Merito medal of the Polish Foreign Ministry. Although enormously honoured by this, I have sadly decided that I cannot accept it as it might give rise to at least the appearance of a conflict of interest in my coverage of Poland.

About me

"The New Cold War", first published in February 2008, is now available in a revised and updated edition with a foreword by Norman Davies. It has been translated into more than 15 foreign languages.
I am married to Cristina Odone and have three children. Johnny (1993, Estonia) Hugo (1995, Vienna) and Isabel (2003, London)